Let’s say you’re hungry. Actually, you’re starving. You haven’t eaten for three days and you would do just about anything for food.
Finally, someone comes with a club sandwich and asks you how much you’ll pay for it. Your answer? “I’ll pay anything for it.”
Now let’s say you’ve just finished eating a Thanksgiving meal. You’re completely stuffed and can hardly look at food.
Someone comes and offers you a club sandwich with the price tag of $2.50, but you wouldn’t eat it even if it was free. You have no use for it.
This is what subjective value is all about. It’s an economic concept that says something is valuable because it is useful to someone, not simply because it is inherently valuable.
How much was that club sandwich worth? Depends on who’s buying it. The same goes for just about anything. I have no interest in owning a boat, so the boat’s value to me isn’t very useful. It is for someone who lives on a lake as long as they want a boat.
It Comes Back To Supply and Demand
It all comes back to supply and demand here. If people aren’t interested in a product, it doesn’t matter how much is available and what the price is. If there is no perceived value, a reasonable person will not buy it.
Just because there is a price tag on something doesn’t mean that it’s worth the same to everyone. Subjective value makes identically priced items more valuable to some people than to others.
The important thing to realize is that value is not determined by the object itself.
Goods and services have value because people want them. The more intense the desire is, the more valuable that good is to that person.
What’s all this mean to me? I’m no economist!
You don’t have to be an economist to see and feel the effect of subjective value. If you understand the concept, you’ll have a better understanding of how to price items in your business or negotiate like a pro if you’re the customer.
At the end of the day, a business needs to figure out what it is that a customer wants. If they understand what is valuable to the customer, they can use subjective value in their favor by pricing items where the customer is willing to pay.
It all sounds simple, but businesses get it wrong everyday because they assume that their product is ‘worth’ so much. Have you ever heard of the phrase ‘it’s only worth what someone will pay for it?” That’s subjective value – it’s a core principle of economics and one that you should know.
Have you ever been willing to pay more for something because it was really worth it to you?
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{ 3 comments… read them below or add one }
Valuation has been a tricky economic concept, consumer of goods and services are the subjective ones not the suppliers whom maximum profit is their goal so it down to market aggergate demand of a collective subjective consumer and supplier cost for the right price to be determine.
Hey Tim,
Have you ever read up about Austrian economics? They speak along the same lines.
Hey Kevin
Yeah, I tend to agree more with the Austrian school of economics. You should check out Mises.org.
Tim
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